Given that I haven't done a weekend
breadth analysis in some time I'm going to backtrack two weeks to
09/14 which showed confluence of breadth metrics indicating that the
market was reaching an extreme zone and susceptible to pullback and
perhaps a correction. First, that date established a new pivot and
52-Week high which has thus far held for 10 days without being
broken.
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| SP 9/28 |
Secondly this coincided with an extreme
reading on the Primary Ratio of the MM.
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| Primary Ratio Market Monitor |
Thirdly, the 10 day ratio of
buying/selling started to wane.
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| 10 Day Buying/Selling |
Also of note is this date pushed the
$BPNYA over 70. On the following chart I've noted when this reading
has moved above 70 and where the market peaks were. Clearly this
reading can remain above 70 for extended periods of time as the SP
can continues to rise so it does not follow that the markets have
necessarily topped when this reaches an extreme level, but it is an
indication that in the least a pullback becomes increasingly likely,
sector rotation may occur, and profit taking and asset reallocation
can happen. There's also a more problematic occurrence to pay
attention to that gives insight into the frothiness of the market
–junk. At some point when the vast majority of higher quality
stocks have given buy signals what remains to increase this reading
will be junk stocks breaking out or broken down stocks bouncing.
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| $BPNYA 09/29 |
One junk stock that I keep on my radar
is ROYL. This is a stock that tends to have significant spikes prior
to market pullbacks and corrections and I use as an alert to indicate
frothiness.
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| ROYL |
Another stock that I noted began to
move during this time was TSTC which showed a price increase of 100%.
When I start to see stocks like these have momentum burst bells
start ringing and red flags start waving.
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| TSTC |
The SP has seen a 14% increase since
the pivot low of this swing that was established in June so this
pullback is in keeping with a move of this magnitude. My continued
focus is to avoid draw downs to my account as much as possible and to
avoid or tip toe around zones where I perceive risk as it relates to
my trading style to be increasing. Typically I trade break outs with
a tight stop and a time horizon of 5 days for a position to prove
itself. What I've experienced is that this is ineffective during
periods of breadth extremes so I've come to learn to trade down much
smaller in size with wider stops to adjust for a higher propensity of
break out failures and widen my holding time for swings as well.
In general I focus my watch list on
stocks near 52-Week highs but during pullbacks many of these tend to
be extended and subject to profit taking. In a rotational market
I've noted that there can be money flow into former leaders or
rebounding stocks so I've begun to scan for set-ups that meet my
criteria in some of these names and focus my attention on highly
shorted stocks for potential squeezes should there be increased
buying in these names.
